European Markets Fall as Deal Is Weighed

By

Michele Maatouk and

Sara Sjolin

Updated March 25, 2013 3:25 p.m. ET

Stocks fell on both sides of the Atlantic as investors worried that like the bailout of Cyprus's banks, aid to other euro-zone financial institutions could involve losses for depositors and senior bondholders.

Under the terms of the bailout, Cyprus will receive €10 billion, or about $13 billion, in bailout funds for its banks. Cyprus Popular Bank, the country's largest bank, will be shut down, while the largest, Bank of Cyprus, will be reduced in size. The deal imposes losses on depositors with more than €100,000 in their accounts, while those with less money will be exempt.

"There was a sigh of relief this morning following the Cyprus deal, but now there has been a lot of criticism leveled at this deal. It highlights many of the old flaws in the euro zone, and it doesn't bode well for future resolutions," said Peter Dixon, strategist at Commerzbank in London.

"They had to tap into deposits, which is not a good thing," he added.

Cyprus secured a bailout from its international creditors early Monday, ending a week of financial panic that threatened to see the small island nation become the first government to leave the euro zone. Gabriele Steinhauser reports. Photo: Reuters

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The U.S. market and Europe's biggest stock indexes rose initially, but then fell after Jeroen Dijsselbloem, head of the group of euro-zone finance ministers that negotiated the deal with Cyprus, said the bailout could serve as a template to resolve any future problems with the region's banks.

In a joint interview with Reuters and the Financial Times, Mr. Dijsselbloem appeared to move away from his previous stance on the bailout, saying that the losses suffered by uninsured depositors as part of Cyprus's bailout deal may have to be repeated elsewhere.

"If there is a risk in a bank, our first question should be 'Okay, what are you in the bank going to do about that? What can you do to recapitalize yourself?' If the bank can't do it, then we'll talk to the shareholders and the bondholders, we'll ask them to contribute in recapitalizing the bank, and if necessary the uninsured deposit holders," Mr. Dijsselbloem said.

The remarks appeared to be a shift from comments Mr. Dijsselbloem, the Dutch finance minister, made Thursday, when he said that Cyprus was a special case.

Mr. Dijsselbloem's spokeswoman said later the comments weren't intended to indicate the Cypriot bank deal would be a model for the future.

In the U.S., the Dow Jones Industrial Average fell 64.28 points, or 0.4%, to 14447.75, while the Standard & Poor's 500-stock index slid 5.2 points, or 0.3%, to 1551.69. The Nasdaq Composite Index fell 9.7 points, or 0.3%, to 3235.30.

By late afternoon in New York, the euro had fallen to $1.2853 from $1.2988 late Friday. It rose as high as $1.3050 in Asian trading as investors welcomed the bailout.

Among commodities, oil for May delivery closed up $1.10 a barrel, or 1.2%, to $94.81 on the New York Mercantile Exchange. Gold for March delivery fell $1.60 per ounce, or 0.1%, to $1,604.60 on Nymex's Comex division.

Corrections & Amplifications Holders of Cyprus Popular Bank bonds will incur steep losses under the terms of the new deal for Cyprus. A previous version of this article named the bank as Banco Popular.

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